Credit squeeze hits Morgan Stanley

Morgan Stanley said its third-quarter earnings fell as the broad sell-off in mortgage and corporate loan markets this summer …

Morgan Stanley said its third-quarter earnings fell as the broad sell-off in mortgage and corporate loan markets this summer delivered a $940 million blow to the broker.

The second largest investment bank by market value said earnings from continuing operations fell 7 per cent to $1.47 billion, (€1.05 billion) or $1.38 a share, in the quarter ended August 31, from $1.59 billion, or $1.50, a year earlier. Both periods exclude results from Discover Financial Services, a credit card company spun off in June.

On that basis, Morgan Stanley fell short of the average analyst estimate of $1.54 a share, according to Reuters Estimates.

Wall Street suffered its worst summer in years as a slowdown in housing markets triggered a broader credit crunch that hammered the value of mortgages, asset-backed securities and corporate loans earmarked for buyouts.

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As a result, Morgan reported $940 million of losses from writing down the value of loans and commitments in its fixed income sales and trading business.

"This is disappointing," said Meg McMullen, president of New England Research & Management. "When Morgan Stanley has lower trading revenue, we have problems."

Morgan Stanley shares fell 1.6 per cent in premarket trading. Morgan Stanley shares fell 24 per cent during the second quarter, when broker dealers on average fell 4 per cent, driven by fears of sinking asset values.

Wall Street's banks rallied yesterday after Lehman Brothers reported better-than-expected results. Bank shares also rose on assurances that the worst of the credit crisis was over, and the Federal Reserve cut benchmark interest rates.

Morgan's net revenue rose 13 per cent to $7.96 billion from last year. Like Lehman, weaker fixed income results were offset by surging investment banking and equities trading.

Profit at Discover Financial Services, the credit card division spun off on June 30, fell 17 per cent to $1.54 billion, or $1.44 per Morgan share.

Including results from Discover and other items, Morgan Stanley's net income fell 17 percent to $1.54 billion.